2019 (2) TMI 696 - AT - Income Tax

Income Tax Tribunal cancels PCIT's order under Section 263, finding assessment not erroneous or prejudicial.

M/s. Harman Connected Services Corporation India Private Limited Versus Principal Commissioner of Income-tax, Bangalore - 3.

M/s. Harman Connected Services Corporation India Private Limited Versus Principal Commissioner of Income-tax, Bangalore - 3. - TMI Issues Involved:1. Initiation of proceedings under Section 263 of the Income Tax Act.2. Addition of Mark to Market (MTM) loss to book profits.3. Addition of prior period expenses to book profits.4. Disallowance of depreciation claimed on outright purchase of software under Section 40(a)(i) for non-deduction of taxes at source.5. Verification of provision for doubtful debts and advances.Detailed Analysis:1. Initiation of Proceedings under Section 263 of the Act:The Principal Commissioner of Income Tax (PCIT) initiated proceedings under Section 263, claiming the assessment order dated 26.03.2014 was erroneous and prejudicial to the interests of Revenue. The assessee contended that the order was neither erroneous nor prejudicial, citing judicial precedents, including the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which postulates that both conditions must be satisfied for Section 263 to be invoked.2. Addition of Mark to Market (MTM) Loss to Book Profits:The PCIT directed the addition of MTM loss to book profits, arguing it was not an ascertained liability. The assessee countered by asserting compliance with Accounting Standard 11 and referenced judicial precedents that MTM losses are not notional or contingent. The Supreme Court's ruling in Apollo Tyres Limited v. CIT was cited, emphasizing that the Assessing Officer (AO) must accept the accounts certified under the Companies Act without probing further.3. Addition of Prior Period Expenses to Book Profits:The PCIT directed the addition of prior period expenses to book profits, stating such addition is not contemplated under Section 115JB. The assessee argued that Section 115JB is a complete code and no adjustments beyond those specified can be made. The Supreme Court's decision in Apollo Tyres Limited v. CIT was again referenced, supporting that the AO cannot alter the book profits except as provided in the Explanation to Section 115JB.4. Disallowance of Depreciation on Purchase of Software under Section 40(a)(i):The PCIT concluded that tax should have been deducted on payments made for software, classifying it as royalty under Section 9 and the India-USA DTAA. The assessee contended that the issue was pending before the Authority for Advance Ruling (AAR), and under Section 245RR, no tax authority can decide on an issue pending before the AAR. The assessee also argued that depreciation, being a statutory allowance, cannot be disallowed under Section 40(a)(i).5. Verification of Provision for Doubtful Debts and Advances:The PCIT questioned the AO's verification of provisions for doubtful debts and advances. The assessee maintained that all necessary details were provided and examined by the AO. The Tribunal observed that the AO had allowed the deductions after due verification in the subsequent order passed under Section 143(3) read with Section 263, thereby satisfying the conditions precedent.Conclusion:The Tribunal concluded that the PCIT's invocation of Section 263 was untenable as the twin conditions of the assessment order being erroneous and prejudicial to the interests of Revenue were not satisfied. The Tribunal canceled the PCIT's order, allowing the assessee's appeal for Assessment Year 2010-11.